Indian banks’ credit profiles are unlikely to improve over the next 12 months, said S&P Global Ratings in a report titled ‘No Quick Cure for India’s Banking Blues’.

Ratings agency Standard & Poors’ building is seen in New York.(Reuters photo)

Indian banks’ stressed assets are likely to increase to 15% of total loans by March 2018 even as their regulatory capital requirements will continue to rise till 2019, S&P Global ratings said on Tuesday.

Indian banks’ credit profiles are unlikely to improve over the next 12 months, said S&P Global Ratings in a report titled ‘No Quick Cure for India’s Banking Blues’.

The banking sector’s total stressed assets will increase to 13-15% of the total by the end of March 2018, with PSU banks accounting for most of that loans, S&P Global Ratings’ credit analyst Deepali Seth Chhabria said.

“The performance of the S&P rated public sector banks that we rate was dismal in the March quarter of the last fiscal. Year-over-year increase in non-performing loans (NPLs) led to higher provisions and lower profits and the capital available to absorb unexpected losses remained thin,” S&P said.

Besides, loan growth was among the lowest in a decade.

“India’s public sector banks will have to continue to rely on external capital infusion to meet the Basel III capital requirements, or sell off their non-core assets or investments,” Chhabria said.

The report said PSU banks operate with a thin capital cushion.

In addition, they may be required to make large “haircuts” on loans to unviable stressed projects, the regulatory capital requirement will continue to rise till 2019, and profitability will remain subdued.

The government has promised to infuse Rs 70,000 crore into its PSU banks over 2016-2019, with Rs 10,000 crore allocated for fiscals 2018 and 2019 each.

“In our view, these amounts will not be sufficient to fully resolve the public sector banks’ looming capital shortfall,” S&P said.

It said capital shortfall and asset quality problems could pave the way for consolidation among the government- owned banks.